Saturday, June 27, 2015

Emerson Electric Company (EMR) Dividend Stock Analysis

Dividend Growth Stock Blog
Hello,


One company which I have constantly on my watchlist is Emeron Electric Company (EMR). In general, my basic DGI strategy is:


Good quality + high yield + high growth (+ time & patience)


This strategy follows the same framework as the SBI book.


I use a simple screen for stocks:
  • Yield over Avg Yield > 1.10
  • Yield > 2.5% (but less than 7%)
  • Payout Ratio < 0.8
  • Chowder > 10


While EMR is slightly below my chowder criteria, it is one of the few companies with a dividend growth history > 50 years.


Emerson Electric Company (EMR) Dividend Stock Analysis


Emerson Electric Company (EMR) makes air-conditioning units, refrigerators and motors for both consumer and commercial use. It provides manufacturing equipment and services for pulp/paper and pharmaceuticals processing plants.


Business Segments



Emerson operates in the following business segments
  • Process Management (28.9% of total sales)
  • Industrial Automation (19.8% of total sales)
  • Network Power (23.9% of total sales)
  • Climate Technologies (16.8% of total sales)
  • Appliance and Tools (18.6% of total sales)
Note: WikiInvest Data

Emerson’s competitors are  General Electric Company (GE), Deere (DE), Caterpillar (CAT) and ABB (ABB).


Criteria List


EMR 6/2015
Area
Criteria
CheckList
Comment
Quality Company
Dividend Growth
>5 years
Yes
58 Years
ROE/Op Margin
Stable
Yes
See Chart
Long term Avg Growth
Stable
Yes - revenue and eps flat 2010
See Chart
FCF over Dividends
Yes
Yes
See Chart
M* Moat
Wide Moat
Yes
Wide
M* & S&P
Credit Rating
> BBB+
Yes
A+
Cash to Debt & Interest Coverage, Debt to Equity
Cash Debt >1 or Interest Coverage > 5
Yes - but TTM Debt/Equity >0.5, (Ten Yrs Debt/Equity <0.5 on average)
Cash to Debt 0.49
Interest Coverage 20.38
Debt to Equity 73.93
M* & S&P Stars
> 3 Stars for both
Yes
M* 4 Stars
S&P CapIQ 3 Stars A+ Quality
Payout Ratio
<60%
Yes
47.00%
Dividend Growth
& Yield
Dividend Yield
>3%
Yes
3.20%
Dividend Growth
>5%
Yes
6.10%
Chowder
>12%
No
9.30%
Valuation
Yield/Avg Yield
>1.1
Yes
1.10
Dividend Yield Theory Mid Point
Below Mid Point
Yes
Mid Point 63.37
Low Point 36
P/E
Below Mid Point
Yes
Median 18.90 Current 14.98
DRRM
~10%
Yes
Assuming 6% growth; projected return=11.16%
M* Estimate
<M* est
Yes
M* 65
S&P Estimate
< S&P cap IQ est
Yes
S&P Cap IQ 64


Note: data from M*, Yahoo, Gurufocus and CCC


Quality analysis


Years of Dividend raises


EMR has 58 years of dividend raises. EMR dividend has been pretty stable.


Stability of key metrics


These ratios provide an indication of how wide the moat is. I am looking for overall stability (or even better - growth). If the ratios decline year over year, then this is an indication of moat reduction and poor management. I also compare these ratios with other companies within the same sectors.
The operating margin and ROE are in the top 90% of Global Diversified Industrials industry.
EMR ROE and Operating Margins are very stable. This is a good indication of strong moat & good management.


Free cash flow over dividends  


I use the free cash flow per share and compare this with dividends per share. FCF should cover the dividends.


As you can see, the FCF easily covered the dividends for the last 10 years. This gives a good indication of continued dividend growth.


Average growth


Here, I look for the stability of growth indicators over ten years using the EPS and Revenue.
The EPS and revenues were growing from 2005 to 2009. From 2008/9 to 2014, it is essentially flat.


From a 10 year average perspective, the averages of the revenue and EPS growth are ~5% and ~9% respectively.
From a 3 year average perspective, it is clear the the growth has been stagnant in recent years.


EPS Analysis

It is good to review the actual earnings and number of outstanding shares to see exactly how the EPS grows.
As you can see, the EPS is mostly correlated with the earnings. There is a reduction of shares from 2005 to 2014 due to buybacks which helps the growth of the EPS.


EPS and Price


Eventually, a lack of earnings over a long period of time will drive a stock price down and the company potentially out of business. On the other hand, a rising EPS will have a positive impact on price.
From a dividends stock perspective, a growing EPS is important for continued dividends growth.


Overall, the EPS has been growing, but flat since 2010. It looks like based on the TTM EPS and forecasted EPS that EMR that the EPS will be growing.


Forecasted EPS



Sep15
Sep16
Sep17
Revenue(Mil)
22,987
23,140
23,143
EPS($)
3.49
3.72
4.03


S&P CapIQ estimates forward 3 Year CAGR EPS to be 8%.


Therefore, there seems to be consensus of a EPS growth in the near future.


M* Moat


I simply use the moat indicator from M* to validate my findings.  M* indicates that EMR has a wide moat.  Another indicator of wide moat, in addition to strong margins and ROE is the ROIC.
With consistent ROIC in the teens, EMR’s moat is very strong. Based on M*, the moat comes from the company’s competitive advantages from three main moat sources: customer switching costs, intangible assets, and cost advantage.


Credit rating


Here, I look for companies with credit rating of BBB+. Just like banks wanting good credit from you when you apply for a loan, you want companies which are stable from a credit perspective.


EMR’s credit rating from M* is A+ which is a good indication of the security of the company.


Debt


I look at the debt to equity ratio (<50) and cash to debt (<1) and interest coverage (>5). Sometimes, a little good debt is good for a business. But too much debt can be a burden.
EMR’s Cash to Debt 0.49 with Interest Coverage at around 20.38 which means the debt can be easily covered. The TTM Debt to Equity is around 73.93  which is above my 50% threshold.


However, over the last 10 years, the debt to equity ratio is well controlled (<50% for the last 10 years).
M* and S&P capital IQ rating


I am looking for 3 stars and above from either. A four/five star is a bonus.  
M* gives EMR 4 Stars and S&P CapIQ gives 3 Stars with A+ quality company


EMR combined stars is 7 - which means it is a good indication to buy.


Dividend Yield and growth


  • Dividend yield is 3.2% which is above my threshold of 3%.
  • 5Y CAGR dividend growth is 6.1  which is higher my threshold of 5%.
  • Chowder is around 9.30% which is below my 12% threshold.
The median is around 8% for the last 10 years.
Payout Ratio
The TTM payout ratio for EMR for the recent quarter is around 75% which is above the threshold of 60%.  For the last ten years, EMR has a payout ratio around ~50%.
Value analysis


Average yield


The current yield per average yield for 5 years ratio is 1.10. I use this as a quick indicator for valuation.This basically means that EMR's current yield is 10% over the average yield - which is around my threshold.


Dividend Yield Theory Mid Point


Using the dividend yield theory spreadsheet (based on the Dividends Don't Lie book), I calculate the mid and high points for the yield, from which I derive the price.  


I estimate the high and low yields to be:


High
4.50%
Low
2.00%


Which produces the high and low boundaries.
This gives the following high, mid and low price ranges.


High Price:
90.53
Mid Price:
65.38
Low Price:
40.23


EMR current price is in around ~56-7s which means it is between the mid and low price line.


P/E Analysis


I can also estimate the fair value using the high and low earnings multiples based on the article and spreadsheet: http://div4son.blogspot.com/2015/06/using-pe-for-dividend-stock-valuation.html


High P/E
24.60
Mid P/E
18.90
Low P/E
13.20




High Price
92.99
Mid Price
71.44
Low Price
49.90


EMR current price is in around ~56-7s which means it is between the mid and low price line.


The median and current P/Es are:


P/E 5 Yr Median
18.90


Current P/E
14.98


This means the current PE is below the 5 Yr Median number which represents that the stock is below fair value.


Dividend Drill Return Model
Also, using the DDRM model per the Dividend Playbook, I try to estimate the total return. Using the growth information from above, I estimate a conservative growth rate of 6%. (The 3yr CAGR EPS from S&P Capital IQ is 8%).


DDRM

Dividend Rate ($)
1.81
Divided by: share price
56.58
Current yield (%)
3.20
Core Growth Estimate (%)
6.00
Divided by: ROE (%)
26.44
Multiplied by: EPS ($)
3.78
Cost of Growth (%)
0.86
Earnings per Share ($)
3.78
Minus: Dividend
1.81
Minus: Cost of Growth
0.86
Funding Gap ($)
1.11
Divided by: Share Price ($)
56.58
Share Change (%)
1.96
Core Growth (%)
6.00
Plus: Share Change (%)
1.96
Total Dividend Growth (%)
7.96
Plus: Dividend Yield (%)
3.20
Projected Total Return (%)
11.16


My threshold for total return is 10%. EMR’s projected total return is 11.16%.


Rearranging the numbers based on the dividend growth & 6% growth:


Dividend Rate ($)
1.81
Required Return (%)
10.00
Growth (%)
7.96
Price
88.96


Dividend Rate ($)
1.81
Required Return (%)
10.00
Growth (%)
6.00
Price
45.26


Average
67.11


The average of the two is around ~$67.


M* and S&P valuations


Morningstar gives EMR a target of $65. S&P capIQ gives a target of $64. Therefore, with a current price around ~56-7s EMR is fairly priced.


Note: The whole point of all the valuation is to get a ballpark estimation. I estimate a fair value of around ~$65.


Risks
  • Emerson has around 25-30% of sales from the energy sector which could be an overexposure to one sector.
  • Emerson’s growth has been stagnant for the last few years and is having difficulties with growth in emerging markets


Conclusion


EMR is one of the few companies that have grown their dividends for more than 50 years. The EPS growth is also decent (with the exception of the recent years, but it looks to grow in the next few years). The dividends yield at around 3.2% is attractive with modest dividends growth.


From a price perspective, I believe the current price (in the ~56-57s) is very reasonable. I will add to my EMR position in the near future if the price remains at these ranges.

That's it for all. What do you think of Emerson?

D4S

Disclosure: Long EMR


4 comments:

  1. Nice analysis! EMR looks like a good pick for the long run. 58 years of increasing dividends doesn't happen by chance.

    ReplyDelete
    Replies
    1. Thanks for you comments. I agree completely. 58 years is hard to beat.
      D4S

      Delete
  2. This is really an informative blog.

    Thanks for the sharing a nice blog that is based on the EMR installation, will definitely help to us.

    EMR installation

    ReplyDelete
    Replies
    1. Avinash,
      I am glad this was useful for you. This article was written based on my investment strategy. Please feel free to read the other pages for more information. I plan to write more on my analysis method in future articles.
      D4s

      Delete